Why is Bitcoin Bad for Criminals?

There are still many who believe that Bitcoin is primarily used for money laundering by criminals who traffic in illegal trades and then exchange the untraceable currency for cash.

While this is not true of all Bitcoin users, it is still certainly the case that many criminals do use Bitcoin as a replacement for cash. Because to them it’s a way to keep illegal transactions off the books.

But what you might be surprised to hear is that using Bitcoin to run your illegal operations is a bad idea. Every Bitcoin transaction leaves a permanent trace. And it is the blockchain architecture of Bitcoin that investigative bureaus are now using to track down the misuse of digital currencies. 

In a report from Hannah Curtis, senior product manager of data at Chainalysis, in 2018, less than 1% of Bitcoin transactions were proven to have been used for trafficking illegal goods and general dark web malfeasances. This number is actually down from 7% in 2012. 

Although this may appear as impressive progress, it still the case that approximately $515 million worth of Bitcoin was used for criminal activity in 2018/2019. Dark-net spending in Bitcoin peaked in 2017, at around $872 million, and has continued to decline since last year.

What’s more, Monero and other cryptocurrencies have since replaced Bitcoin as the primary currency to use on the dark web

money laundering darknet activity with Bitcoin

The Cause of the Shift 

Ross Ulbricht’s dark website, the Silk Road, is the most infamous for dark web trafficking. Imprisoning Ulbricht was a watershed moment in the history of internet crime punishment. It was also an impressive example of international cooperation and digital crimes.

Gary Davis was also sentenced to 6.5 years in prison for helping manage the Silk Road. According to a report by Irish independent radio station Newstalk, when 31-year-old Irish Davis was arrested, he was extradited to the United States. Davis worked as both forum moderator as well as a site administrator at a later time of the Silk Road.

The Silk Road was primarily used to traffick illegal drugs and child pornography. Between January 2011 and October 2013, according to U.S. officials, the Silk Road operated over 1.5 million transactions with a total value of more than $213 million. 

So how did Ulbricht’s star fall, as well as countless other dark web projects?

Charles Delingpole, the founder of ComplyAdvantage, a company that screens entities and monitors transactions, spoke to Hard Fork, stating: 

“The most famous mistake made by a cryptocurrency criminal is to de-anonymize oneself. When running Silk Road, Ross Ulbricht made the mistake. He used identifiable aliases that were traced back to his real-world identity.”

The bad news for bad people is that with money laundering, you eventually need to cash out or use identity for something in the physical world. And unlike cash, when it comes to the digital world, there is always a trace. 

Agencies Acknowledging the threat

Using Bitcoin and other cryptocurrencies for illegal activity is high on the list of concerns for both the US Federal Bureau of Investigation (FBI), the European Union Agency for Law Enforcement Cooperation (EUROPOL). Investigative bureaus are coordinating efforts to deal with the issue. Including the recent collaboration to take down a large-scale crypto money laundering service based in Spain.

Currently, the FBI is the owner of the world’s biggest Bitcoin wallet. Christopher Wray, the FBI’s director, stated that cryptocurrencies were “a significant problem that will get bigger and bigger.” In June 2018, the Bureau announced that it had 130 active cryptocurrency investigations.

US President Donald Trump has also signed an executive order to create a task force focused on developing cryptocurrency fraud investigations.

Moreover, these investigations have moved into cryptocurrency tumblers, also called mixing services, such as Bestmixer.co. Mixers are services that obscure the trail of cryptocurrencies so that finding the original source is difficult or impossible. 

The reasoning behind this move is obvious, and frankly unsurprising. Money laundering and trafficking with cryptocurrency is taken very seriously. 

In June 2019, over 300 cryptocurrency experts from both law enforcement and the private sector attended the sixth Cryptocurrency Conference. It was hosted at The Hague, the Netherlands at Europol’s headquarters. 

This is part of a new age that plans to heavily police illegal activity associated with cryptocurrencies and dark markets. 

Katherine Haun and the FBI

Katherine Haun is at the helm of Bitcoin investigations run by the FBI. Haun is the Department of Justice prosecutor-cum-cryptocurrency investor. She is the co-head of the $350 million cryptocurrency fund that the FBI organizes. Haun comes by the position honestly as she spent years investigating prison gangs, corrupt officials and mafia-related crimes.

Haun is right to view Bitcoin and cryptocurrency the same way as cash. Cash can make criminal activity much easier. However, just like cash, Bitcoin is not itself the problem. Rather Bitcoin is a tool that can be used to remain mostly anonymous. 

But, as I stated earlier, unlike cash, Bitcoin is in fact traceable. 

Haun states:

“The government was able to use that same [blockchain] technology to actually track down criminal activity it might not otherwise have been able to. Without the technology underlying Bitcoin, we never would have been able to catch those people.”

It is not just mafia crimes and illegal narcotics that Haun is interested in, however. Haun’s most comprehensive investigation into crimes involving cryptocurrencies are white-collar crimes and instances of public corruption. 

In these cases, government agents have exploited early adopters of cryptocurrency. One such agent defrauded approximately 20,000 BTC. another case involved the extorting of the creator of the Silk Road dark web site. 

Bitcoin and Anonymity 

Bitcoin is touted for being pseudo-anonymous because you do not need to attach your name to your address. This is very true, and for safety’s sake, you definitely should not add your name to your address. 

The way Bitcoin transactions take place is from one address to another, like an email address that has been encrypted. But there is always the public record of every transaction made with Bitcoin kept on the immutable blockchain public ledger.

That means that anyone can pull up a transaction record. However, the challenge is following the bread crumbs of older transactions, and this really comes down to the computation and financial resources to follow that trail to its original address. 

It is possible to use Tor to maintain the secrecy of your IP address and your location. However, as more cryptocurrency thefts and dark web activity occurs, the better those who are tracking and tracing the criminal activity get at finding the original location of the transaction. 

And it is not only EUROPOL and the FBI who are invested in tracking these projects. Private crypto-bounty companies have started to try and find stolen Bitcoin and other valuable cryptocurrencies.

The bottom line is, crime might pay your bills, but Bitcoin leaves a trail of those bills.

Analyzing the Blockchain with money laundering in mind

Bitcoin was designed to work like cash and to improve peer-to-peer transactions. But it wasn’t designed for criminal activity. Bitcoin was the first successful digital currency because creator Satoshi Nakamoto was able to apply the immutable cryptography of blockchain technology. 

The blockchain architecture that is the main feature of a cryptocurrency, is what maintains a record that makes Bitcoin analyzable and traceable. Every transaction on the blockchain is encoded on an immutable record. 

The cryptographically encoded transactions are maintained on the blockchain public ledger. So although personal information is omitted, it is completely anonymous; it is pseudo-anonymous. 

Given the right resources, this ledger makes Bitcoin transactions traceable. As a result, the number of accounts under investigation has increased in the past two years, as have the successful arrests and shutting down dark web sites.  

That means that Bitcoin is a secure cryptocurrency because it maintains a permanent record. There is a record of all the transactions ever made on Bitcoin’s blockchain. This record is exactly the trail of crumbs that investigative agencies and private security companies are using to follow. 

Cash remains the only untraceable currency. 

While there are indeed criminals getting rich off cryptocurrency, Charles Delingpole, the founder of ComplyAdvantage states that:

“The biggest crime, however, is the theft of savings from thousands of overly trusting millenials and libertarians who believed that somehow cryptocurrencies were a panacea for the failure of investments or the lack of wage growth elsewhere,” 

ComplyAdvantage and Elliptic

ComplyAdvantage and Elliptic are private specialized firms that collaborate with law enforcement agencies. These companies constantly collect and analyze the data of cryptocurrency transactions to reduce the problem of false positives and improve the success of investigations. 

ComplyAdvange technical architecture leverages data science and machine learning to understand these risks computationally. They also review data manually. However, their combined approach results in data being updated in minutes rather than months, which was the case with other investigative technology.

Similarly, Elliptic is a London based company that was founded by Tom Robinson in 2013. Elliptic’s main task is to provide blockchain analysis services. With the help of Elliptic, UK law enforcement was able to catch a dark web dealer selling MDMA.

“Our focus is on preventing money laundering rather than tracking down criminals. To achieve this, we provide tools to businesses such as cryptocurrency exchanges and financial institutions, that allow them to screen cryptocurrency transactions for links to criminal activity,” states creator Robinson told Hard Fork

In order to track down money launderers, Elliptic uses tools to monitor blockchain activity. That means that whenever a Bitcoin transaction is made through an exchange or a bank Elliptic traces the transaction back to the original wallet that sent the funds; such as a ransomware wallet or a dark web marketplace.

“This means that we have to continually collect data relating to cryptocurrency addresses associated with this illicit activity,” says Robinson. 

It is no small job, so in order to compile the data from Bitcoin transactions, Elliptic uses several kinds of high-powered automated processes.

money laundering

Blockchain Security: To Crime or Not To Crime

Well, when it comes to starting crime rings or dark websites, the simple answer is don’t do it. It’s not just government agencies that are concerned with illegal activity anymore either, private industries are stepping to protect individual property and investments. 

Criminal activity and money laundering will continue as long as there is a desire for black market products. However, Bitcoin is certainly not the cause of criminal activity any more than cash is the cause of criminal activity. 

More importantly, it is important to remember that the technology that allows secure cryptocurrencies like Bitcoin to function, that is the underlying blockchain architecture, is what makes Bitcoin TOTALLY TRACEABLE. 

The radical libertarians among us might be annoyed that investigative bureaus are heavily invested in creating data banks to stop illegal activity. The investigations will mean more taxation implications, greater KYC requirements, and stronger anti-money laundering regulations.

What to expect down the road

This also means that certain aspects of the privacy that crypto-users currently enjoy may disappear over time. At the very least, you can expect that suspicious activity will be flagged. But it also means that data banks of cryptocurrency transactions are in development.

It is important to remember that there are positives to all of this interference. That is, aside from putting the kibosh on child pornography peddlers and dangerous narcotics. 

One of the benefits of the added attention to cryptocurrency crimes and security is that the number of cryptocurrency users has increased. And as the usability and access to cryptocurrency increases, so will the value and utility of your current digital assets. 

Moreover, who isn’t tired of internet scams and wild volatility in the crypto-market? The fact that governments are taking cryptocurrency money laundering and security seriously is evidence of the positive and powerful effects digital currencies have had on the market. However, this likely means that we are only going to see digital currency and security improve from here. 

All of these measures and investigations may not be the libertarian or Utopian dream of many. But they certainly signal that cryptocurrencies are here to stay.

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